CREDIT SCORING: HOW DOES IT AFFECT YOU?
If you are shopping for auto or homeowners insurance, or if your current policy is
up for renewal, your insurance company may be looking at your credit history.
Here are some tips from the National Association of Insurance Commissioners to
help you understand how your credit information may be used and how it may
affect your insurance premiums.
What is Credit Scoring?
A credit score is a snapshot of your credit at one point in time. The credit
information from your credit report is put through a mathematical formula (credit
scoring model) that assigns weights to the various factors and summarizes your
credit information into a three-digit number ranging from zero to 999. Generally,
the higher the number, the more financially responsible the consumer.
How is Credit Scoring Used?
If your insurance company relies on credit scoring, it may used in two ways:
- Underwriting - deciding whether to issue you a new policy or to renew your
- Rating - Deciding what price to charge you for your insurance by placing you
into a specific rating “tier” or level.
Some insurers use credit information along with other more traditional rating
factors, such as motor vehicle records and claims history.
What Affects a Credit Score?
There are several factors that determine credit scores. Each factor is assigned a
weighted number that, when applied to your specific credit information and added
together, equals your final three-digit score. Following is a list of common factors:
- Major negative items - Bankruptcy, collections, foreclosures, liens, chargeoffs, etc.
- Past payment history - Number and frequency of late payments.
- Length of credit history - Amount of time you’ve been in the credit system.
- Homeownership - Whether you own or rent.
- Inquiries for credit - Number of times you’ve recently applied for new
accounts, including mortgage loans, utility accounts, credit card accounts, etc.
- Number of open credit lines - Number of major credit cards, department
store credit cards, etc., that you’ve actually opened.
- Type of credit in use — Major credit cards, store credit cards, finance
company loans, etc.
- Outstanding debt — How much you owe compared to how much credit is available to you.
Know Your Credit History
There is a good chance your current or prospective insurance company is
looking at your credit. It is recommended that you review your credit history
annually to make sure that it is accurate. For a fee, you can request a copy of
your credit history from agencies such as Equifax
Experian www.experian.com or Trans Union
www.transunion.com. You can also
contact the Federal Trade Commission for consumer brochures on credit at
www.ftc.gov. The Fair Credit Reporting Act requires an insurance company to tell
you if it has taken an “adverse action” against you, in whole or in part, because of
your credit report information. If your company tells you that you have been
adversely affected, it must also tell you the name of the national credit bureau
that supplied the information so that you can get a free copy of your credit report
and correct any errors.
Take Charge of Your Credit History
If your insurance company is using your credit score to evaluate your rates, you
can take steps to improve your premiums.
- Get a copy of your credit report and correct any errors. Notify your insurance
agent and company of any errors.
- Improve your credit history if you’ve had past credit problems. If your credit
score is causing you to pay higher premiums, ask your insurer if you can be
reevaluated when your credit improves.
Get More Information
Insurance rates based on credit information can vary from company to company,
so if you feel your premiums are too high, shop around. Some states have
regulations in place for how — and if — insurance companies may use credit
scores. In the state of Mississippi, credit scoring is not prohibited as criteria for
underwriting or rating. However, an insurance company cannot decline, refuse to
renew, or cancel a policy of personal insurance based solely on a credit score. If
you have additional questions or concerns about credit scoring in Mississippi,
contact the Mississippi Department of Insurance toll free at 800-562-2957. Visit
the Department’s website at